Accounting Information Systems, 6th edition

James A. Hall

COPYRIGHT © 2009 South-Western, a division of Cengage Learning. Cengage Learning and South-Western
are trademarks used herein under license
Objectives for Chapter 4
 Tasks performed in the revenue cycle, regardless of the
technology used
 Functional departments in the revenue cycle and the flow
of revenue transactions through the organization
 Documents, journals, and accounts needed for audit
trails, records, decision making, and financial reporting
 Risks associated with the revenue cycle and the controls
that reduce these risks
 The operational and control implications of technology
used to automate and reengineer the revenue cycle
 Sales Order
1

Credit / Customer
Service REVENUE CYCLE
2 (SUBSYSTEM)
Cash Receipts/
Collections
6

Shipping

Billing/ Accounts
Receivable
4/5
Journal Vouchers/Entries
How do we get them?
 Billing Department prepares a journal voucher:
Accounts Receivable DR
Sales CR
 Inventory Control Dept. prepares a journal
voucher:
Cost of Goods Sold DR
Inventory CR
 Cash Receipts prepares a journal voucher:
Cash DR
Accounts Receivable CR
 Revenue Cycle Databases
 Master files
 customer master file
 accounts receivable master file
 merchandise inventory master
file
 Transaction and Open
Document Files
 sales order transaction file
 open sales order transaction
file
 sales invoice transaction file
 cash receipts transaction file
• Other Files
– shipping and price data
reference file
– credit reference file (may not
be needed)
– salesperson file (may be a
master file)
– Sales history file
– cash receipts history file
– accounts receivable reports
file
DFD of Sales Order Process
Sales Order Process Flowchart
Sales Order Process Flowchart
 Manual Sales Order Processing
 Begins with a customer placing an order
 The sales department captures the essential details on a
sales order form.
 The transaction is authorized by obtaining credit
approval by the credit department.
 Sales information is released to:
 Billing
 Warehouse (stock release or picking ticket)
 Shipping (packing slip and shipping notice)
 Manual Sales Order Processing
 The merchandise is picked from the Warehouse and sent
to Shipping.
 Stock records are adjusted.
 The merchandise, packing slip, and bill of lading are
prepared by Shipping and sent to the customer.
 Shipping reconciles the merchandise received from the
Warehouse with the sales information on the packing slip.
 Shipping information is sent to Billing. Billing compiles
and reconciles the relevant facts and issues an invoice to
the customer and updates the sales journal. Information
is transferred to:
 Accounts Receivable (A/R)
 Inventory Control
 Manual Sales Order Processing
 A/R records the information in the customer’s account in
the accounts receivable subsidiary ledger.
 Inventory Control adjusts the inventory subsidiary ledger.
 Billing, A/R, and Inventory Control submits summary
information to the General Ledger dept., which then
reconciles this data and posts to the control accounts in the
G/L.
DFD of Sales Returns
Sales Returns Flowchart
Sales Return Journal Entry
G/L posts the following to control accounts:

Inventory—Control DR
Sales Returns and Allowances DR
Cost of Goods Sold CR
Accounts Receivable—Control CR
DFD of Cash Receipts Processes
Cash Receipts Flowchart
Manual Cash Receipts Processes
 Customer checks and remittance advices are received in
the Mail Room.
 A mail room clerk prepares a cash prelist and sends the prelist
and the checks to Cash Receipts.
 The cash prelist is also sent to A/R and the Controller.
 Cash Receipts:
 verifies the accuracy and completeness of the checks
 updates the cash receipts journal
 prepares a deposit slip
 prepares a journal voucher to send to G/L
Manual Cash Receipts Processes
 A/R posts from the remittance advices to the
accounts receivable subsidiary ledger.
 Periodically, a summary of the postings is sent to G/L.
 G/L department:
 reconciles the journal voucher from Cash Receipts
with the summaries from A/R
 updates the general ledger control accounts
 The Controller reconciles the bank accounts.
Summary of Internal Controls
Authorization Controls
 Proper authorization of transactions
(documentation) should occur so that only valid
transactions get processed.
 Within the revenue cycle, authorization should take
place when:
 a sale is made on credit (authorization)
 a cash refund is requested (authorization)
 posting a cash payment received to a customer’s account
(cash pre-list)
Segregation of Functions
Three Rules
1. Transaction authorization should be separate from
transaction processing.
2. Asset custody should be separate from asset record-
keeping.
3. The organization should be so structured that the
perpetration of a fraud requires collusion between
two or more individuals.
 Segregation of Functions
 Sales Order Processing
 credit authorization separate from SO processing
 inventory control separate from warehouse
 accounts receivable sub-ledger separate from general
ledger control account
 Cash Receipts Processing
 cash receipts separate from accounting records
 accounts receivable sub-ledger separate from general
ledger
Supervision
 Often used when unable to enact
appropriate segregation of duties.
 Supervision of employees serves as a
deterrent to dishonest acts and is
particularly important in the mailroom.
Accounting Records
 With a properly maintained audit trail, it is
possible to track transactions through the systems
and to find where and when errors were made:
 pre-numbered source documents
 special journals
 subsidiary ledgers
 general ledger
 files
Access Controls
 Access to assets and information (accounting records)
should be limited.
 Within the revenue cycle, the assets to protect are cash
and inventories and access to records such as the
accounts receivable subsidiary ledger and cash journal
should be restricted.
 Independent Verification
 Physical procedures as well as record-keeping should be
independently reviewed at various points in the system to
check for accuracy and completeness:
 shipping verifies the goods sent from the warehouse are
correct in type and quantity
 warehouse reconciles the stock release document (picking
slip) and packing slip
 billing reconciles the shipping notice with the sales invoice
 general ledger reconciles journal vouchers from billing,
inventory control, cash receipts, and accounts receivable
Automating the Revenue Cycle
 Authorizations and data access can be performed
through computer screens.
 There is a decrease in the amount of paper.
 The manual journals and ledgers are changed to
disk or tape transaction and master files.
 Input is still typically from a hard copy document
and goes through one or more computerized
processes.
 Processes store data in electronic files (the tape or
disk) or prepare data in the form of a hardcopy
report.
Automating the Revenue Cycle
 Revenue cycle programs can include:
 formatted screens for collecting data
 edit checks on the data entered
 instructions for processing and storing the data
 security procedures (passwords or user IDs)
 steps for generating and displaying output
 To understand files, you must consider the record design
and layout.
 The documents and the files used as input sources must
contain the data necessary to generate the output reports.
Computer-Based Accounting Systems
 CBAS technology can be viewed as a continuum with
two extremes:
 automation - use technology to improve
efficiency and effectiveness
 reengineering – use technology to
restructure business processes and firm
organization
Example: Automated Batch Sales
Reengineering Sales Order Processing Using
Real-Time Technology
 Manual procedures and physical documents are replaced
by interactive computer terminals.
 Real time input and output occurs, with some master files
still being updated using batches.
 Real-time - entry of customer order, printout of stock
release, packing slip and bill of lading; update of credit
file, inventory file, and open sales orders file
 Batch - printout of invoice, update of closed sales order
(journal), accounts receivable and general ledger
control account
Real-time Sales Order
 Advantages of Real-Time
Processing
 Shortens the cash cycle of the firm by reducing the time
between the order date and billing date
 Better inventory management which can lead to a
competitive advantage
 Fewer clerical errors, reducing incorrect items being
shipped and bill discrepancies
 Reduces the amount of expensive paper documents and
their storage costs
Reengineered Cash Receipts
 The mail room is a frequent target for reengineering.
 Companies send their customers preprinted envelopes
and remittance advices.
 Upon receipt, these envelopes are scanned to provides a
control procedure against theft.
 Machines are open the envelopes, scan remittance
advices and checks, and separate the checks.
 Artificial intelligence may be used to read handwriting,
such as remittance amounts and signatures.
Automated Cash Receipts
 Point-of-Sale Systems
 Point of sale systems are used extensively in retail
establishments.
 Customers pick the inventory from the shelves and take
them to a cashier.
 The clerk scans the universal product code (UPC).
The POS system is connected to an inventory file,
where the price and description are retrieved.
 The inventory levels are updated and reorder needs can
immediately be detected.
 Point-of-Sale Systems
 The system computes the amount due. Payment is
either cash, check, ATM or credit card in most cases.
 No accounts receivables
 If checks, ATM or credit cards are used, an on-line link
to receive approval is necessary.
 At the end of the day or a cashier’s shift, the money and
receipts in the drawer are reconciled to the internal
cash register tape or a printout from the computer’s
database.
 Cash over and under must be recorded
Computerized POS
Reengineering Using EDI
 EDI helps to expedite transactions.
 The customer’s computer:
 determines that inventory is needed
 selects a supplier with whom the business has a formal
business agreement
 dials the supplier’s computer and places the order
 The exchange is completely automated.
 No human intervention or management
 EDI System
Company A Company B
Application Purchases Sales Order Application
Software System System Software

EDI EDI
Translation Translation
Software Software
Direct Connection
Communications Communications
Software Software

Other
Mailbox

Company VAN Company

A’s mailbox B’s mailbox

Other
Mailbox
 Reengineering Using the
Internet
 Typically, no formal business agreements exist as they
do in EDI.
 Most orders are made with credit cards.
 Mainly done with e-mail systems, and thus a turnaround
time is necessary
 Intelligent agents are needed to eliminate this time lag.
 Security and control over data is a concern with Internet
transactions.
CBAS Control Considerations
 Authorization - in real-time systems, authorizations
are automated
 Programmed decision rules must be closely monitored.
 Segregation of Functions - consolidation of tasks by
the computer is common
 Protect the computer programs
 Coding, processing, and maintenance should be
separated.
 CBAS Control Considerations
 Supervision - in POS systems, the cash register’s internal
tape or database is an added form of supervision
 Access Control - magnetic records are vulnerable to both
authorized and unauthorized exposure and should be
protected
 Must have limited file accessibility
 Must safeguard and monitor computer programs
CBAS Control Considerations
 Accounting Records - rest on reliability and
security of stored digitalized data
 Accountants should be skeptical about the accuracy of
hard-copy printouts.
 Backups - the system needs to ensure that backups of all
files are continuously kept
 Independent Verification – consolidating
accounting tasks under one computer program can
remove traditional independent verification
controls. To counter this problem:
 perform batch control balancing after each run
 produce management reports and summaries for end
users to review
PC-Based Accounting Systems
 Used by small firms and some large decentralized firms
 Allow one or few individuals to perform entire
accounting function
 Most systems are divided into modules controlled by a
menu-driven program:
 general ledger
 inventory control
 payroll
 cash disbursements
 purchases and accounts payable
 cash receipts
 sales order
PC Control Issues
 Segregation of Duties - tend to be inadequate and
should be compensated for with increased
supervision, detailed management reports, and
frequent independent verification
 Access Control - access controls to the data stored
on the computer tends to be weak; methods such as
encryption and disk locking devices should be used
 Accounting Records - computer disk failures cause
data losses; external backup methods need to be
implemented to allow data recovery